6 Potential Takeover Targets

After a fairly long dry spell, important factors are converging to facilitate increased merger and acquisition activity. If played properly, this could be a bonanza for investors. M&A activity, whether negotiated or through a hostile deal, should be helped by the following factors:

Interest rates are very low, and credit availability for good borrowers is easing.

Corporate balance sheets are full of cash and, in many cases, are greatly under-levered.

Stock valuations for many targets are still attractively low.

The current slow-growth economic environment makes it tempting for acquirers to juice their own organic performance with the size and expense synergies of an acquisition.

The economy is still early in the current economic expansion. If housing and employment continue to build and an up-cycle ensues, M&A deals taking place now will look extremely successful in hindsight.

Low financing rates and undemanding valuations mean that many acquisitions can be easily and quickly accretive to earnings.

Value investors have traditionally had more than their share of takeovers in their portfolios. The reason is simple: They tend to look at a potential investment much the same way a prospective acquirer would. They need to see that a company is attractively and inaccurately priced in the market based on its own sustainable operating fundamentals, strategy and outlook.

Here are six companies (with their latest closing prices) that we like as standalone investments that could very well be acquired in a resurgent M&A environment:

Monster Worldwide (MWW) ($8.50), the online employment solutions company, has the highest likelihood on this list of being acquired, as it has already announced that it is reviewing strategic alternatives for all or parts of its business, including a possible sale. MWW is touting a complete reinvention of itself with new products and more competitive technology, all of which should put it squarely in the path of an improving global economy. Other attractive attributes include strong market share in each of its respective markets, tremendous brand awareness, premiere technology and products, and very depressed valuation. We believe MWW should be of great interest to any number of strategic or financial buyers. The ultimate takeover price could be $12 to 12.50 per share if it is acquired by private equity, and $13 to $15 per share if it's a strategic buyer.

Alcoa (AA) ($9.76) is a very well-run company in a commodity-driven cyclical business. M&A activity has been persistent in the metals and mining industry, and AA is a dominant player in a relatively narrow segment, which should be a long-term winner as aluminum's attributes become more evident. While consolidation in the aluminum industry is off the radar lately, we think that could change in upcoming periods.

Devon Energy (DVN) ($65.91) has a history of doing the right thing for shareholders, most recently selling its offshore and international reserves. DVN used the proceeds to shrink its capitalization and to pursue a rich slate of North American oil and liquids prospects. As low natural gas prices have weakened its share price recently, DVN's low valuation and stable assets could prove attractive to an oil major, similar to Exxon Mobil's (XOM) deal with XTO Energy.

Harris Corp. (HRS) ($44.21) has a new CEO, Bill Brown, previously from United Technologies (UTX), whom we regard very highly; and they are probably not very interested in selling. Its military radio and government communications systems businesses are top notch and nicely profitable, throwing off strong free cash flow. But as government spending is constrained, the large defense prime contractors may have a hard time finding program growth and may have to rely on acquisitions to drive profit growth. Harris is large enough to make a difference, small enough to be a manageable bite, and strong enough to add strategic value.

Medical device companies like St. Jude Medical (STJ) ($38.33) and Zimmer (ZMH) ($63.06) are important participants in their industries: cardiac rhythm management and orthopedic implants, respectively. Government reimbursement pressure is relentless, yet their markets keep expanding as the benefits of medical technology on health and quality of life become even more compelling. These are both large companies with comparatively good growth and profitability, as sluggishness elsewhere in the health care sector may embolden the largest players to look at buying growth via M&A.